Question

Suppose the Schoof Company has this book value balance sheet: Current assets $30,000,000 Current liabilities $20,000,000 Fixed assets 70,000,000 Notes payable $10,000,000 Long-term debt 30,000,000 Common stock (1 million shares) 1,000,000 Retained earnings 39,000,000 Total assets $100,000,000 Total liabilities and equity $100,000,000 The notes payable are to banks, and the interest rate on this debt is 11%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the company's permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of $1,000, an annual coupon interest rate of 9%, and a 15-year maturity. The going rate of interest on new long-term debt, rd, is 11%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $54 per share. Calculate the firm's market value capital structure. Do not round intermediate calculations. Round the monetary values to the nearest cent and percentage values to two decimal places.

Answer 1

Total market value of capital structure=Short term debt+Long term debt+Equity value

Short term debt=Notes payables= $10,000,000

Market value of Long term debt:

Use PV function in EXCEL to find the price of the bond

=PV(rate,nper,pmt,ffv,type)

rate=11%

nper=15 years

pmt=coupon rate*face value=9%*1000=90

fv=face value=1000

=PV(11%,15,90,1000,0)=$856.18

Market value of debt=number of bonds*Price of bond=30,000*856.18=$25,685,478.25

==>Equity value=number of sahres*price of each share=1,000,000*54=$54,000,000

Total market value of capital structure=10,000,000+25,685,478.25+54,000,000=$89,685,478.25